Wednesday, August 8, 2012

Taxing Credulity

The silly U.S. campaign back-and-forth over tax rates reminds me of the old story (apparently apocryphal) about Winston Churchill.

As the story goes (some variations substitute the likes of Oscar Wilde or George Bernard Shaw for the British prime minister), Churchill is at a dinner party and says to the woman next to him, “Madam, would you sleep with me for five million pounds?”

Replies the woman, “My goodness, Mr. Churchill. I suppose I would.”

Churchill then asks, “Would you sleep with me for five pounds?”

Indignant, the lady exclaims, “Mr. Churchill, what kind of woman do you think I am?”

Comes the reply, “Madam, we’ve already established that. Now we are haggling about the price.”

Mr. President, we have already established that the wealthy should (and, in fact, do and always have) pay a greater share of their income in taxes than everyone else. All you are doing is haggling over exactly how much more than everyone else they should pay.

If the wealthy find this line of political rhetoric annoying, it’s because the president keeps implying that the wealthy are paying less than everyone else. This is neither true in dollar terms nor in percentage terms. The thing is that people (even greedy rich ones) actually don’t necessarily mind that much paying more in taxes, but they don’t particularly enjoy being attacked for being freeloaders when they are already footing the vast majority of the taxpayer bill. Those of us who don’t care for deceptive rhetoric from our national leader don’t care much for it either. The president implies that the lower and middle classes are somehow paying more because the wealthy aren’t paying enough. But they don’t.

The fact is that the lower half of earners in the U.S. pay no tax at all, so the upper 50 percent carry the entire load. The maligned top one percent pay 40 percent of the taxes. That doesn’t mean they shouldn’t pay an even higher percentage, but it’s fundamentally dishonest to frame the argument as if the bulk of the burden currently lies on the backs of the lower and middle classes. Their main burden is a bad economy, and higher taxes on the wealthy won’t fix that problem—and could make it marginally worse in the short term.

How is it that the lower half pay no taxes? I blame George W. Bush. To get his famous tax cuts (every time current tax rates are extended, they are to this day referred to as “the Bush tax cuts”), he cut a deal with Democrats to raise the lower threshold for getting caught in the tax net, thereby freeing millions of people from having to make a net contribution to the U.S. treasury at all. Speaking strictly mathematically, this was a disaster. Shrinking the tax base deprived the treasury of much more revenue than any tax cut for the rich. That’s because, collectively, the middle classes earn much more money than the wealthy. Politics aside, it makes much more sense to draw those people back into the tax system than to raise taxes on the wealthy—if you had to choose between the two, which you don’t. (You could do both and raise even more revenue.)

But expanding the tax base isn’t something that is likely to happen. Nobody wants to alienate the middle class because there are too many of them. The Democrats, in particular, don’t want to because, if they can define themselves as the party of no taxes for the lower half, that puts them in reach of a theoretical critical mass of having a perpetual electoral majority. Once you get to the point where 51 percent pay no taxes (or have no “skin in the game,” as the president likes to say), you have a potential situation where that 51 percent can elect the government and tax the other 49 percent as much as they like.

That may make great politics on paper, but it is also a great way to drive an economy into the ground. Personally, I don’t want to be in the position of defending the rich from tax increases. But I do want the president to stop the distraction of campaigning on tax rates (which, in the end, make little difference in terms of the country’s economic problems) and to at least try to do something about fixing the economy. That means tax reform and entitlement reform.

Yes, everyone knows that nothing can get done on such big issues so close to an election. But the problem is that the president has had nearly four years to do something about them (with big majorities in Congress the first two years), and he never bothered even to try. Instead, he and Congress made things worse by piling uncertainty on top of uncertainty with short-term stop-gap measures on taxes (instead of permanent rates that would allow long-range business planning) and a major healthcare bill (adding yet more uncertainty for business planning) that most people want repealed.

Is there anything to suggest that he would be any more effective in a second term?

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